FRENCH insurer Axa, seen in the City as a front-runner in any bidding race for Prudential, yesterday unusually ruled itself out with a clear denial of interest.

After mounting speculation over the past few days that it was stalking the Pru, the insurer said yesterday: "Axa confirms unequivocally it is not in discussions with Prudential concerning any bid, merger or other type of business combination transaction and has no plan or intention to enter into such discussions or any such transaction."

Shares in Prudential, which were puffed up by the GBP17bn bid by Aviva last month, sagged 13.5p to 654p. Prudential has said it has an independent future and declined to comment.

However, the denial is unlikely to snuff out merger talk in the sector, which has seen a string of big cross-continental deals in the past few months.

Speculation of an Axa bid gained momentum after Prudential rebuffed Aviva, prompting the Norwich Union owner to withdraw its bid after less than a week, on March 23.

Observers had thought there might be something behind subsequent market chatter, claiming that Aviva had made its move partly out of fear that Axa was about to pounce. Sceptics, however, said there were plenty of investors who were long on the Prudential stock with an interest in keeping the bid talk going.

Axa has been fair game for market rumours since its chief executive, Henri de Castries, said last month that the company wanted to play a part in consolidation in the insurance sector but had "no plans to buy a bank".

According to a recent broker's note from Keefe, Bruyette & Woods: "Traditionally, Axa tends to buy low and restructure companies to release value - this would rule out Prudential."

US insurerAIG, said to have acquisition firepower of up to GBP30bn, has been named as a possible alternative suitor for Prudential, as has Germany's Allianz, as consolidation fever appears to be gripping the sector across Europe.

Allianz's chief executive, Michael Diekmann, has told analysts he will engage in "no major mergers and acquisitions in the foreseeable future".

However, some analysts and investment bankers say that if bidding breaks out, Allianz could be drawn into the fray, along with Axa, and that both Aviva and the smaller Prudential have been left looking weakened by the abortive encounter.

The opposing view, which is also relevant to the forthcoming flotation of Standard Life, is that the UK life assurance market is unattractive. Allianz Cornhill, the German group's UK arm, sold its life unit to Britannic in 2004 for GBP110m.

Allianz is said to regard the dynamics of the UK life assurance business as unattractive, because ownership of the distribution chain, where the bulk of profits are made, is difficult.

The recent big deals in the sector have seen acquisitions of Italian, US and Scandinavian insurers.

Axa, meanwhile, is said to have an acquisition warchest of only around GBP3bn in cash, hardly enough for a major cash deal in the UK where institutions would be reluctant to accept non-UK shares.

Both Prudential and Aviva are, however, attractive targets because of their successful expansion drives into overseas markets, though medium-sized and UK-oriented players Legal & General, Friends Provident and Royal and SunAlliance - and perhaps soon Standard Life - are also never far from market rumours of potential bid interest.